Overview of Medical Inflation and Workers’ Compensation
Inflation began to spike in late 2021 and has continued to rise at a moderate to high rate through 2024. According to the U.S. Bureau of Labor Statistics, as of April 2022, the inflation rate, measured by the Consumer Price Index (CPI), was 8.3%. This sharp increase was driven by the influx of COVID-19 stimulus funds into the economy, along with post-pandemic recovery factors such as supply chain disruptions and labor shortages. Higher energy costs have also played a significant role, impacting the costs of vehicles, food, and housing.
Medical inflation, specifically, refers to the rising costs of healthcare services and treatments over time, including medical procedures, doctor fees, medications, and hospital charges. Since 2021, medical inflation has outpaced the general economy's inflation. As of October 2024, the medical inflation rate stood at 2.9%.
In the context of workers' compensation, these economic trends affect lost time claim frequency, medical severity, indemnity severity, and wage inflation.
Factors Influencing Medical Inflation in Workers’ Compensation
Employee Shortage and Wage Increases
Industries across most sectors are facing a shortage of qualified workers, leading organizations to compete for talent by increasing wages. This trend contributes to a rise in benefit payouts and indemnity costs.
As inflation and salaries climb, the amount an organization pays in indemnity benefits also rises. Injured employees typically receive indemnity compensation equal to two-thirds of their pre-injury wages, subject to minimum and maximum weekly payouts. As wage inflation drives up these thresholds, indemnity payouts increase as well.
Labor Market
The "Great Resignation," beginning in November 2021, saw a record number of Americans leave their jobs. Many workers reassessed their work-life balance and opted not to return to traditional office or job site settings, even as companies reopened.
Before the COVID-19 pandemic, the unemployment rate was around 3.5%. It peaked at 14.7% in April 2020. Additionally, many short-tenured workers continue to receive benefits even if they choose not to return to work, as long as they qualify for indemnity or medical payouts.
Rising Provider Costs
Healthcare inflation has surged due to an increase in medical care consumption. Inflation affects not only the cost of medical supplies, administration, and facilities, but also staffing costs due to labor shortages. In June 2024, prices rose 3% across the economy compared to the previous year, while medical care costs increased by 3.3%. Rising wages for healthcare workers exert additional pressure on medical prices, impacting services covered by workers' compensation.
Fee Schedules and Their Role in Cost Control
Explanation of Fee Schedules in Workers' Compensation
Fee schedules are state-regulated lists that determine the maximum allowable charges for healthcare services under workers' compensation. In Massachusetts, for example, the rates are updated annually and serve to control medical cost growth, standardize rates, and reduce disputes over payments. Negotiated fees are sometimes allowed to facilitate agreements between carriers and providers.
Delayed Cost Reflection in Inflationary Periods
A challenge with fee schedules is that they may lag behind real-time medical inflation. As a result, while physician reimbursement for some services declines, hospital outpatient services may see payment increases, leading to higher healthcare costs for injured workers. This discrepancy impacts both employers and insurance companies, especially if states base fee schedules on overall inflation rather than specific medical costs.
Studies show that higher inflation across industries leads to faster growth in workers' compensation costs when fee schedules are adjusted based on general price changes instead of targeted medical inflation.
Tips for Workers’ Compensation Carriers and Employers
- Review Fee Schedules Regularly — Utilize state-regulated fee schedules or negotiate them when possible to set rates for medical services, ensuring cost control without sacrificing the quality of care for employees.
- Encourage Telehealth and Telemedicine — These options can help reduce medical claim costs by offering convenient and often less expensive alternatives to in-person visits.
- Direct Employees to In-Network Providers — Avoid unnecessary out-of-network expenses by guiding employees to preferred healthcare networks.
- Promote a Safe Work Environment — Implement and monitor safety standards to minimize workplace injuries. Consider offering remote work, light-duty tasks, or modified schedules to attract and retain employees.
The recent surge in inflation has had significant implications for workers' compensation, particularly in relation to medical costs and indemnity benefits. By understanding these trends and proactively addressing them—through measures like reviewing fee schedules, utilizing telehealth, and maintaining a safe workplace—carriers and employers can better manage the challenges posed by inflation. Staying informed and adapting strategies to these economic shifts will be critical in minimizing the impact on workers' compensation claims and maintaining financial stability in the industry.
